…..Stocks slip for the week. Focus on tax cuts but the devil is in the details. Oil drops. Consumer sentiment up. 3 men v. 160 million. Baba’s Singles’ Day. Earnings. Veterans Day tomorrow – thank you.
Financial Review by Sinclair Noe for 11-10-2017
DOW – 39 = 23,422
SPX – 2 = 2582
NAS + 0.89 = 6750
RUT + 0.25 = 1475
10 Y + .07 = 2.40%
OIL – .31 = 56.86
GOLD – 8.90 = 1276.60
The S&P 500 and the Dow Jones Industrial Average ended the week lower for the first time in nine weeks. For the week, the Dow lost 0.5 percent and the S&P 500 slipped 0.2 percent. The Nasdaq gave up 0.2 percent for the week, snapping six weeks of weekly gains.
The yield on 10-year Treasuries punched through 2.40 percent, joining a spike in European sovereign rates. Junk bonds stabilized after 3 days of declines. Global equities hit historic highs during the week as investors were encouraged by solid earnings and synchronized global economic growth.
Wall Street remained focused on Washington and the promise of tax cuts. Republican tax writers in the House and Senate are scrambling to find ways to make the math work on their respective tax plans. The House Ways and Means Committee hammered together a bill and sent it toward the House floor for a vote promised next week, while the Senate Finance Committee revealed a proposal it intends to mark up on Monday. After the Senate plan’s release Thursday, Sen. Jeff Flake voiced fears about the effect of broad cuts on the national debt. The budget resolution approved by Congress allows it to pass a plan that adds as much as $1.5 trillion to federal budget deficits over a decade. While the nonpartisan Congressional Budget Office has not scored the Senate plan, it estimated that an earlier version of the House bill would increase federal budget deficits by $1.7 trillion over 10 years. The current plans appear to come nowhere close to canceling out tax cuts with new revenue. The House is on track now to hold a vote before Thanksgiving, and the Senate perhaps soon after. But it’s far from clear either measure can pass in the opposing chamber, let alone be combined into one bill that can clear both and land on Trump’s desk.
Republican plans to overhaul US taxes includes a provision to cut the corporate tax rate from 35% to 20%. The House Republicans’ proposal would make the cut immediately, while the Senate Republicans’ plan would delay the cut for two years, which freaked out Wall Street. The corporate tax cut is the single most important part of Republicans’ proposals. The Tax Policy Center estimates that the House plan would cost the government $2 trillion in revenue over the next 10 years, and that is a problem because they can only blow a $1.5 trillion hole in the budget. On its face, cutting corporate taxes is a good idea. Most economists believe that it is more efficient to tax people, not companies. Taxes on companies discourage them from making investments and encourage them to move profits abroad to tax havens. There are strong arguments that lower corporate taxes would increase economic growth, especially if corporate tax cuts were targeted to provide relief for companies that invest in new equipment, or hire more employees or for more research and development.
The problem with Republican proposals to reduce corporate taxes is that the $2 trillion in cuts are not replaced by other revenues. Thus, the government would borrow money to cut corporate taxes, on the bet that the economy will grow faster and make up for the shortfall. It almost certainly won’t. The Tax Foundation, an ideologically conservative think tank, finds that even with increased economic growth, the Republican tax plan will lead to $1 trillion in lost government revenues, and more government debt. There is a very simple solution to pay for corporate cuts. Hike income taxes on the rich.
Currently, the top federal income tax rate, applied to incomes above $480,000, is 39.6%. Among wealthy countries, that rate is comparatively low. Researchers from the Brookings Institution estimate that raising the US’s top income tax rate by 10 percentage points—in line with the rates in Japan and Sweden—would generate about $100 billion in government revenue every year. That would pay for a large portion of the corporate tax cuts. A review of the academic literature by the IMF found that an increase in the top income tax rate is unlikely to negatively impact the US economy. And an analysis by a researcher at Uppsala University concluded that the US could raise its top income tax rate above 70% on the very rich without a significant negative impact on the economy. That could pay for some hefty corporate tax cuts. The current plan to cut corporate tax rates and individual rates for the wealthy just doesn’t add up. You can’t eat your cake and have it, too.
The more we dig into the tax plan, the more it seems the whole scheme was just slapped together with bailing wire and duct tape. Take the plan to eliminate the tax credit for adoptions. That idea didn’t sit well with Pro-Life, pro-family evangelicals. Late yesterday, the House Ways and Means Committee realized their error and added the credit back to their bill. The question remains – what were they thinking? And the answer is – they weren’t. They’re just looking to get a bill passed and they aren’t paying attention to details.
Crude oil was down slightly as expectations OPEC and other producers will extend their production cut agreement were offset by U.S. drillers adding the most oil rigs in a week since June, indicating output will continue to grow. U.S. energy companies added nine oil drilling rigs in the week to Nov. 10, the second increase in three weeks, bringing the total count up to 738. Meanwhile, the political situation in Saudi Arabia remains sufficiently volatile to spike crude prices at any given time. Over the past week, Saudi security officials rounded up dozens of members of Saudi Arabia’s political and business elite in a corruption purge. War in Yemen, a dispute with the Gulf emirate of Qatar and growing tension with Iran is a concern to investors too. We saw that this week as West Texas Intermediate briefly popped up to $57.92, its highest since July 2015.
The University of Michigan consumer sentiment index fell to 97.8 from 100.7 in October. Gauges of both current and future expectations declined — but the index still was at its second-highest level since January. There was a slight rise in expectations for inflation over the next year, and growing expectations of increasing interest rates.
A new report from the Institute for Policy Studies shows inequality is growing. According to the report, three men – Bill Gates, Jeff Bezos, and Warren Buffet – have collectively more wealth than the 160 million poorest Americans, or half the population of the United States. The study shows the bottom 19 percent of Americans are financially underwater, meaning they have zero or negative net worth. Even those low- and middle-income families who do have some wealth often don’t have any liquid assets — cash or savings — at their disposal. Over 60 percent of Americans report not having enough savings to cover a $500 emergency.
Today is Alibaba’s big day – Singles’ Day, an annual online discount sales event that has become the world’s biggest shopping spree. It started out as a sales gimmick – Alibaba offered a day of discounts with the idea that lonely hearts could buy a gift for themselves. It has now become the biggest day for shopping – outpacing Black Friday and Cyber Monday combined. In the first 3 minutes today, sales topped $1.5 billion. Sales for the 24-hour period are expected to top $24 billion. The event gets shoppers around China scouting for bargains and loading up their online shopping carts, while delivery men – and robots – are braced for an estimated 1.5 billion parcels expected over the next six days.
Yesterday, after the closing bell, Nvidia and Disney posted third quarter earnings. Nvidia jumped 6 percent and hit a record high after the chipmaker’s revenue forecast for the current quarter topped estimates. Disney rose 2.7 percent as the promise of a new “Star Wars” trilogy overshadowed its weak quarterly results.
Equifax reported a third-quarter revenue miss late Thursday. New customers are putting off contracts with Equifax until, or unless, the company can prove its cybersecurity practices are up to par. Most of Equifax’s business is selling services to other businesses, and there is always a concern that customer deferrals will turn into cancellations. After stripping out nearly $90 million in breach-related costs, Equifax claimed a third-quarter profit beat. I’m guessing $90 million might not be enough to clean up their mess.
Department store chain J.C. Penney reported third-quarter same-store sales that were twice what it had estimated. The retailer said comparable sales rose a better than expected 1.7 percent. Penney’s still reported a net loss of $128 million for the quarter – nearly double the loss from a year earlier, but much of the loss was due to heavy discounting to clear slow-moving inventory. Share popped 14%.
Tomorrow is Veterans Day. The holiday traces its origins back to the end of World War I. On Nov. 11, 1918, an armistice between the U.S.-led Allied nations and Germany went into effect on the 11th hour of the 11th day of the 11thmonth – the date recognized as the end of the “war to end all wars.” November 11th was originally called Armistice Day. There are 6.7 million Vietnam Era veterans in 2016. There were 7.1 million who served during the Gulf War (representing service from August 1990 to present); 768,263 who served in World War II; 1.6 million who served in the Korean War; and 2.4 million who served in peacetime only. There are 18.5 million military veterans in the U.S. according to the Census Bureau. 9.2 million of those are age 65 and older. Tomorrow, Veterans Day, is a good day to say thank you for their service and for our freedom. It’s always a good day to say thank you – no need to wait. So, to all veterans listening today – Thank you.